What is the primary function of reinsurance?

The primary function of reinsurance is to manage risk by transferring it to other insurers. Reinsurance allows primary insurance companies to share a portion of their risk with other insurance entities. This practice helps to stabilize the insurer's financial performance by protecting it from large losses that could arise from catastrophic events or significant claims. By mitigating these risks, insurers can also maintain solvency and promote more sustainable premium pricing, as they are better positioned to absorb variations in loss experience.

In the context of the insurance industry, effective risk management is crucial. Reinsurance serves as a crucial tool for insurers to spread their exposure and improve their ability to underwrite new policies, as it provides a safety net against unforeseen losses. Therefore, rather than expanding the customer base or reducing premiums directly, reinsurance focuses on balancing the risk portfolio of insurers, which can indirectly benefit policyholders by ensuring that the primary insurance provider remains financially healthy.